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Auctions versus Negotiations

Author

Listed:
  • Herweg, Fabian

    (University of Bayreuth)

  • Schmidt, Klaus M.

    (University of Munich)

Abstract

For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, a scoring auction implements the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is particularly costly, and if the buyer\'s bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.

Suggested Citation

  • Herweg, Fabian & Schmidt, Klaus M., 2017. "Auctions versus Negotiations," Rationality and Competition Discussion Paper Series 12, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:12
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Daniel Prudencio, 2023. "Productivity in Procurement Auctions of Pavement Contracts in Mexico," Journal of Productivity Analysis, Springer, vol. 60(1), pages 63-85, August.
    2. Herweg, Fabian & Schmidt, Klaus M., 2020. "Bayesian implementation and rent extraction in a multi-dimensional procurement problem," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    3. Bacchiega, Emanuele & Bonroy, Olivier & Petrakis, Emmanuel, 2020. "Auctions vs. negotiations in vertically related markets," Economics Letters, Elsevier, vol. 192(C).
    4. De Chiara, Alessandro, 2020. "Precontractual investment and modes of procurement," European Economic Review, Elsevier, vol. 124(C).
    5. Fabian Herweg & Klaus M. Schmidt, 2020. "Procurement with Unforeseen Contingencies," Management Science, INFORMS, vol. 66(5), pages 2194-2212, May.
    6. Matthias Aistleitner & Christian Grimm & Jakob Kapeller, 2018. "Auftragsvergabe, Leistungsqualitaet und Kostenintensitaet im Schienenpersonenverkehr. Eine internationale Perspektive," ICAE Working Papers 86, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    7. Fabian Herweg & Marco A. Schwarz, 2018. "Optimal Cost Overruns: Procurement Auctions With Renegotiation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1995-2021, November.
    8. Fugger, Nicolas & Gretschko, Vitali & Pollrich, Martin, 2019. "Sequential procurement with limited commitment," ZEW Discussion Papers 19-030, ZEW - Leibniz Centre for European Economic Research.
    9. Dejan Makovšek & Adrian Bridge, 2021. "Procurement Choices and Infrastructure Costs," NBER Chapters, in: Economic Analysis and Infrastructure Investment, pages 277-327, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Adaptation costs; auctions; behavioral contract theory; loss aversion; negotiations; procurement; renegotiation;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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